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Contemporary US Commercial Arbitration Meets Ancient Chinese Curse

Contemporary US Commercial Arbitration Meets Ancient Chinese Curse

Source:
Canadian Arbitration and Mediation Journal

Date:
Fall/Winter 2012

28
Canadian Arbitration and Mediation Journal
Since Congress enacted the Federal Arbi-
tration Act (“FAA”) in 1925, the percent-
age of business-to-business disputes re-
solved through arbitration rather than
litigation has been steadily rising.
How-
ever, in the 1970’s and 80’s, there was a
dramatic increase in the number, complex-
ity and dollar value of these arbitrations.
More of the biggest corporate battles were
being fought out before arbitrators rather
than judges.
The causes for this develop-
ment were many including, a growing
backlog of cases in state and federal courts,
an explosion in discovery costs, some
frighteningly large jury verdicts for com-
pensatory and punitive damages, and
growing stables of respected, experienced
arbitrators at JAMS, AAA, and other pro-
viders.
The shift from litigation to arbitra-
tion became so great that a few years ago
a federal judge I know said to me “I have
no doubt that you have a more interesting
civil docket than I do.”
Generally pleased with this shift of com-
mercial disputes to arbitration, many com-
panies started including in their adhesion
contracts with employees, consumers,
bank borrowers, utility customers, cell
phone users, etc. etc. small print clauses
that said the parties agreed
to give up their
rights to go to court and would instead ar-
bitrate all their disputes.
Plaintiff trial law-
yers attacked these clauses, contending that
Contemporary US
Commercial Arbitration
Meets Ancient Chinese
Curse:
May you Live in Exciting Times.
1
forcing the little guy to give up his consti-
tutionally protected right of jury trial was
unconscionable, against public policy and
unenforceable.
The courts agreed if the
clauses were patently unfair, for example,
by providing that only the company would
choose the arbitrator, or that the hearing
would take place at the company’s home
office rather than where the employee/con-
sumer lived or worked, or that there would
be no discovery, or that the hefty arbitra-
tion fess would be split 50-50, or that the
relief available in arbitration would be less
extensive than a court could have decreed.
However, so long as the process prescribed
by these mandatory arbitration clauses was
fair and even-handed, the court generally
upheld them.
Emboldened by this victory, US compa-
nies began arguing that mandatory arbi-
tration could only be conducted on an in-
dividual, not a class, basis, either because
the company- written clause expressly said
so or because a clause which was silent
about class arbitration should be presumed
to preclude it.
Here again, the courts largely
rejected the trial lawyers’ attacks.
Reason-
ing that a class action is a markedly differ-
ent process than resolution of an individual
claim, the courts held that it was not un-
conscionable for these mandatory clauses
to expressly prohibit class arbitration and
that, where the clause was silent, it should
be construed to bar class arbitration un-
less it was very clear that the parties in-
tended to permit it.
Facing the possible disappearance of all
class proceedings in employment and con-
sumer cases, with their potential for huge
fee awards and tremendous settlement le-
verage, and having been repeatedly re-
buffed in court, the trial lawyers turned
their attention, vast resources, and numer-
ous political IOU’s toward Congress and
mounted a major effort to have mandatory
arbitration clauses outlawed legislatively.
Here, their outcries fell on fertile ground.
Over the last several years many bills have
been introduced banning such clauses in
particular industries.
More significantly,
the so-called Fairness in Arbitration Act,
introduced a few years ago, would ban all
pre-dispute arbitration clauses in consumer
and employment cases; only arbitration
clauses freely entered into after the dispute
arose would be enforceable.
Many of us in the commercial arbitration
world were sympathetic to the notion that
consumers and employees ought to have
some protection from adhesion contracts
that forced them to arbitrate rather than liti-
gate.
And because, as a practical matter,
consumers and employees with small
claims have little chance of finding
lawyers to sue for them, and studies
suggested that these little guys, on av-
erage, were doing as well or better in
arbitration than they had in litigation,
many thought the best solution was for
Congress to require that all mandatory ar-
Honorable
Curtis von Kann
These are indeed exciting and somewhat worrisome times in US
commercial arbitration.
To understand why this is so, we need to turn
the clock back a little to see how we got to where we are.
In the
interests of time, I will simplify the history a bit.29
Le Journal canadien d'arbitrage et de médiation
bitration clauses meet the minimum due
process standards that had been voluntar-
ily adopted by JAMS and AAA.
Even an outright ban on pre-dispute arbi-
tration clauses might have been OK had it
been limited to adhesion contracts.
How-
ever, the Fairness in Arbitration Act was
so broadly written that it would have pre-
cluded pre-dispute arbitration clauses in
most commercial contracts as well.
For this
reason, the AAA, Chamber of Congress,
and others lobbied Congress to exclude
commercial arbitration from the reach of
the Act, and its scope was indeed scaled
back somewhat in subsequent versions of
the bill.
Because Congress has been effec-
tively deadlocked since 2010 due to di-
vided control of the House and Senate, the
Arbitration Fairness Act has not yet passed.
However, it remains pending, with over
100 sponsors, and whether it will pass, and
what effect it might have on commercial
arbitration, is far from clear.
Meanwhile, back in the commercial arbi-
tration arena, there were other troubling
developments.
With many very big cases
being decided by arbitration, leaving many
well-heeled losers in their wake, creative
entrepreneurial lawyers soon realized that
there were big bucks to be had from those
losers if they could find ways to overturn
those awards.
Thus was born a new legal
cottage industry- the Award Terminators.
These diabolical demons of destruction
have thus far concentrated their efforts
chiefly on three avenues of attack.
First were attempts to have arbitration
clauses declare that, in addition to the four
narrow grounds for vacatur provided by
the FAA –namely, fraud or corruption, evi-
dent partiality of the arbitrators, failure to
receive material evidence or to postpone a
hearing on good cause shown, or arbitra-
tors exceeding their powers – federal
courts could also vacate awards for fac-
tual or legal errors of the arbitrator.
At least
in the US, the hallmark of commercial ar-
bitration had always been finality, the no-
tion that parties, having chosen their deci-
sion-makers, have to abide by their
decisions and could not engage in the broad
appellate review available in court.
The
expansion of FAA review to include errors
of fact or law would have eviscerated such
Finality.
In the case of Hall Street Associ-
ates v. Mattel, the US Supreme Court held
that the FAA’s grounds for vacatur could
not be expanded by private agreement, thus
blocking this avenue of attack in federal
courts, although not in state courts, which
were free to adopt a different interpreta-
tion of their own state arbitration laws.
The second avenue of attack pursued by
the Award Terminators was trying to ex-
pand the historic doctrine of manifest dis-
regard of law.
For many decades some
courts had held that the FAA vacatur
grounds of arbitrators “exceeding their
powers” included cases in which the arbi-
trator said, in effect, “I know that the law
requires X result in this case but I am go-
ing to disregard the law and decree what I
happen to think is the proper outcome.”
Seizing on this doctrine, the Terminators
argued that, when an arbitrator made a
clear error of law in her award, she had
effectively disregarded the law and should
be subject to vacatur for such an error.
Again, in the Hall Street case, the Supreme
Court seemed to say that manifest disre-
gard of the law was not a ground for vaca-
tur under the FAA, though, again, state
courts might interpret their own state arbi-
tration statues differently.
However, be-
cause the Supreme Court’s language was
not as precise as it might have been, lower
federal courts have been uncertain whether
the doctrine retains any vitality and the
Circuit Courts of Appeal are now split on
that question, a conflict the Supreme Court
will have to resolve soon.
The third avenue of attack utilized by the
Terminators has been to claim that the ar-
bitrator made insufficient disclosures at
the outset or during the course of the
arbitration.
When the alleged failure of
disclosure involved some prior contact
with a party, lawyer, law firm, or wit-
ness, the courts have generally rejected
the challenge on grounds that the informa-
tion not disclosed could not have led a rea-
sonable person to question the arbitrator’s
neutrality.
However, there have been some
highly publicized cases
2
in which courts
have vacated awards, and named and ex-
coriated the arbitrator, for failure to dis-
close a connection that was simply too
close for the court to stomach.
And recently, some awards have been chal-
lenged on grounds that the arbitrator failed
to disclose something about his or her “life
experiences” which might raise a question
about impartiality.
For example, in an ar-
bitration in which a woman complained
that her employment had been terminated
in retaliation for having reported
sexual harassment by her supervisor,
the arbitrator was challenged for fail-
ure to reveal that years earlier, while a
sitting judge, he had been disciplined
for sexual harassment.
In another arbi-
tration, involving the equitable distri-
bution of considerable property in con-
nection with a highly contentious divorce,
the arbitrator failed to reveal that he too
had been through a highly contentious di-
vorce and a bitter fight about division of
property.
While the incidence of vacatur
for failures of disclosure is still relatively
low, it is growing, reminding us of the wise
advice “Disclose, Disclose, Disclose.”
It
rarely gets you bumped from a case, but
withholding something can get you pub-
licly humiliated if some judge later thinks
it ought to have been disclosed.
Finally, I turn to what is perhaps the most
worrisome development in US commercial
arbitration.
I mentioned earlier that, ini-
tially, US companies reported being very
happy with the commercial arbitration pro-
cess.
However, over the past decade, there
has been a mounting chorus of complaints
that commercial arbitration has become
just as slow and costly as litigation.
That
is certainly possible since, as big commer-
cial cases migrated from litigation to arbi-
tration, so did the big case litigators who
generally wanted to conduct the arbitra-
tions in the same way, and bill the same
amounts, as when the cases were in litiga-
tion.
What is surprising here is the response
to this phenomenon announced by many
smart in-house counsel, i.e., “arbitrations
are now costing my company just as much,
and taking just as long, as litigations, so
we have decided to litigate rather than ar-
bitrate our cases.”
Say what? If the aver-
age cost and cycle time for commercial
arbitrations and commercial litigations are
indeed the same, something that has not
been empirically demonstrated to date,30
Canadian Arbitration and Mediation Journal
then, cost and delay cannot serve as a ra-
tional basis for choosing one process over
the other.
Instead, a rational client would
presumably choose arbitration for cases
that demanded its particular benefits, e.g.,
the right to pick the decision makers, the
rules, the procedures, the time and loca-
tion of the hearing, and whether or not the
decision will include a statement of rea-
sons; privacy; and finality, and would
choose litigation for cases that demanded
its particular benefits- a public decision,
a
legal precedent, a right of appeal, and ju-
dicial contempt power to enforce sub-
poena, injunctions, decrees of specific per-
formance, etc.
Nevertheless, whether rational or not, the
growing list of companies who said they
were abandoning commercial arbitration
due to its costs and delays spurred action
from many of us who believe that such
arbitration is often
a very favorable pro-
cess for resolving commercial disputes,
and also one in which we make our living.
In 2009, as President of the College of
Commercial Arbitrators, I convened in
Washington, DC a day long National Sum-
mit on Commercial Arbitration.
Present
were distinguished representatives of the
four major constituencies involved in such
arbitration, namely, in-house counsel, out-
side counsel, arbitration providers and ar-
bitrators.
There was broad consensus that
all four constituencies bore some respon-
sibility for increased arbitration costs and
delays and that all four had a role to play
in reducing those excesses.
I was particu-
larly pleased to hear many in-house attor-
neys from major companies publicly state
that, to a large extent, they had allowed
this problem to develop.
One such attor-
ney said “We are primarily to blame for
this problem.
In these big arbitrations, we
have given the keys to the litigators, who
naturally conduct the arbitrations just like
litigations.”
Following the Summit, former CPR Presi-
dent Thomas Stipanowich, AAA arbitra-
tor Deborah Rothman, and I took the tran-
script of the Summit, and other suggestions
submitted by various stakeholders, and
wrote what was entitled “The College of
Commercial Arbitrators’ Protocols for
Expeditious, Cost-effective Arbitration.”
After analyzing the various causes of the
problem, this document prescribed for each
constituency a dozen or so steps they each
could take to dramatically reduce cost and
delay in commercial arbitration.
The steps
proposed were hardly radical; rather we
sought to pull together in one place worth-
while ideas that had been circulating in
various forums for several years.
Time pre-
cludes us from discussing all these steps,
but to give you a flavor of the document,
let me mention a few.
For Business Users
and In-House Counsel, the Protocols rec-
ommend that companies include in their
arbitration clauses limits on discovery and
motions, that they select outside counsel
for arbitration (not litigation) expertise and
select arbitrators who are proven case man-
agers, that they set limits on the time and
money they are prepared to devote to the
arbitration, and that in-house counsel stay
actively involved throughout the arbitra-
tion to monitor compliance with those lim-
its.
Outside Counsel are urged to recognize
and exploit the differences between arbi-
tration and litigation, to cooperate with
opposing counsel on scheduling and pro-
cedural matters, to limit discovery to what
is truly needed, to keep arbitrators in-
formed about case progress, and to enlist
their help promptly when needed.
Arbitra-
tion Providers should offer users a wide
range of arbitration models and rules (in-
cluding fast track arbitration with no dis-
covery or motions), should insist that
their panelists have training in manag-
ing cases efficiently, and should col-
lect and make available to users infor-
mation on how well particular
arbitrators perform that function.
Fi-
nally the Protocols recommend that Ar-
bitrators obtain training in managing
commercial arbitration, that they insist
on cooperation and professionalism
between counsel, that they actively shape
and manage the arbitration from start to
finish and schedule consecutive hearings
days whenever possible, and that they be
readily available to counsel when needed
to resolve procedural problems and keep
the arbitration on track.
If I were asked “what is the single most
important recommendation in the Proto-
cols,” I would say that it is for companies
to include in their arbitration clauses an
absolute deadline by which the arbitration
must be concluded.
British civil servant
and wit Cyril Northcote Parkinson taught
us 50 years ago, in Parkinson’s Law, that
“work expands to fill the amount of time
available for its completion.”
I might add
that this is particularly true where the
workers, counsel and arbitrators, are
paid on an hourly basis.
The fastest trial
court in the US federal system is the
Eastern District of Virginia which sets
virtually all cases, no matter how com-
plex, for trial about six months after
the complaint is filed and hardly ever
grants continuances.
When counsel are
given a strict and tight deadline like
that, they find ways to eliminate the
peripheral discovery and issues and get
promptly to the core of the dispute.
At our
Summit, the Deputy General Counsel of
Bechtel, who supervised some of the most
complex arbitrations in the world, said she
has never seen a commercial case that
could not have been fairly and properly
arbitrated within one year.
Thus, I would
love to see all companies recite in their
arbitration clauses a requirement that all
cases involving, say, $10 million or less
be concluded within six months from ser-
vice of the arbitration demand and all other
cases within twelve months and that the
arbitrators are empowered to so schedule
and manage the case as to assure compli-
ance with those deadlines.
So the big question now is whether these
kinds of measures will be adopted and will
save the day.
Can the commercial arbitra-
tion ship be righted at this point and re-
turned to its prior status as the preferred
forum for complex commercial dispute or
is it going to sink under the weight of its
own excesses?
I am not sure of the answer
to that question.
Over the past year, many
commercial arbitrators have told me that
they have recently experienced significant
decreases in their caseloads.
Such a falloff
might be attributable, at least in part, to
faltering Economy and to the increasing
number of cases that settle in mediation
before they can proceed to either arbitra-
tion or litigation.
More disturbing is a 2011 survey by
Cornell University of Fortune 1000 com-
panies.
In 1997, 85% of those companies31
Le Journal canadien d'arbitrage et de médiation
that responded to the survey reported us-
ing arbitration in commercial contracts at
least once in the prior three years.
In 2011,
only 60% of the survey respondents so re-
porting, a drop of nearly 1/3.
Reasons given
for not using arbitration included, besides
high costs, no right of appeal, a concern
that arbitrators will not follow the law, and
the perception that arbitrators often split
the baby (something repeatedly disproved
in AAA studies).
On the other hand, there are indications
that publications like the Protocols are
finding a receptive audience.
More than
10,000 copies have been distributed all
over the country and Fellows of the Col-
lege have touted them at more than 100
conferences and professional programs,
garnering broadly favorable reactions.
Last
year the Protocols won awards from both
the ABA and CPR and they are now avail-
able for download from the websites of all
the Summit sponsors, namely, JAMS,
AAA, ABA, CPR, and the Chartered In-
stitute of Architects, as well as the
College’s own website (www.thecca.net).
Last fall, Thomas Sager, the General Coun-
sel of DuPont, sent a copy of the Proto-
cols to the general counsel of all Fortune
1000 companies along with a letter urging
that they implement them at their compa-
nies just as he has done at DuPont.
Last
week, while speaking at an ABA program
in Washington, DC, I was told by the
Deputy General Counsel of Viacom that
his company believes commercial arbitra-
tion is definitely worth saving and that his
company is implementing the Protocols.
Being an optimist, I am hopeful that we
are about to witness the redemption of
commercial arbitration rather than its de-
mise.
But that will require major efforts by
all of us to turn the juggernaught of cost
and delay away from its present course
toward the shoals of despair and into the
bright sunlight of expeditious and eco-
nomical arbitration proceedings.
I hope you will all join in that effort.
With nearly 40 years as a trial lawyer, judge
and neutral, Judge von Kann has experience
in virtually every field of civil law and disputes.
He literally wrote the book on business arbi-
tration as editor-in-chief of the CCA’s Guide
to Best Practices in Commercial Arbitration.
Judge von Kann has arbitrated and mediated
an impressive array of disputes in locations
throughout the United States and abroad.
Depuis que le Congrès a promulgué la
Federal Arbitration Act (FAA) en 1925, le
pourcentage de différends entre entrepri-
ses résolus par le biais de l’arbitrage plu-
tôt que par procédures judiciaires n’a cessé
de croître. Cependant, dans les années
1970 et 1980, le nombre de tels arbitra-
ges, leur complexité et leur coût ont connu
une augmentation exponentielle. La ma-
L ’arbitrage commercial contemporain aux États-Unis
soumis à une malédiction chinoise :
« Puissiez-vous vivre à une époque passionnante ».
1
Honorable Curtis von Kann
jeure partie des différends d’envergure
entre entreprises ont été disputés devant
des arbitres et non des juges. Les rai-
sons d’une telle situation sont nom-
breuses : accroissement du nombre de
cas non réglés devant les tribunaux de
l’État et les tribunaux fédéraux, explo-
sion des coûts des enquêtes préalables,
des verdicts de jury effroyablement lourds
eu égard aux dommages-intérêts compen-
satoires et punitifs, des cohortes d’arbitres
respectés et expérimentés auprès de four-
nisseurs de services de résolution
extrajudicaire des conflits comme les or-
ganismes Judicial and Mediation Services,
Inc. (JAMS) ou l’American Arbitration
Association (AAA). Le passage à l’arbi-
trage a pris une telle ampleur qu’un juge
fédéral que je connais m’a dit, il y a quel-
ques années : « Je suis persuadé que vous
avez plus de dossiers d’affaires civiles in-
téressants que moi ».
En général, le fait que les différends com-
1 REMARKS AT THE APRIL 26, 2012 ANNUAL GENERAL MEETING OF THE
TORONTO COMMERCIAL ARBITRATION SOCIETY
2 In the seminal case of Commonwealth Coatings Corp. v. Continental Casualty Co.,
393 U.S. 145 (1968), the United States Supreme Court held that failure of an arbitra-
tor to disclose a material relationship with one of the parties constitutes “evident
partiality” under Federal Arbitration Act § 10(a)(2) requiring vacatur of the arbitra-
tion award.
In subsequent cases, federal and state courts have tried to determine what
kinds of relationships are “material” enough to warrant vacatur of an award.
See, for
example, Applied Industrial Materials Corp. v. Ovalur Makine Ticaret Ve Sanayi, 492
F3d. 132 (2
nd
Cir. 2007) (award vacated where arbitrator failed to disclose discus-
sions between his company and the parent company of a party and arbitration agree-
ment forbade service “where the arbitrator or the arbitrator’s current employer has a
direct or indirect interest in the outcome of the arbitration”); Crow Construction Co.
v. Jeffrey M. Brown Associates Inc., 264 F. Supp 2d 217 (E.D. Pa. 2003) (award va-
cated for failure to disclose that one arbitrator had served in another case as a media-
tor for a party and two arbitrators had previously served as arbitrators for a party);
Dealer Computer Services, Inc. v. Michael Motor Co., Inc., No. H-10-2132 (S.D. Tex.
Dec. 2010) (award in favor of plaintiff vacated where arbitrator had disclosed that she
had previously served on an arbitration panel that considered dispute between plaintiff
and another party but did not disclose that the cases involved similar contract provisions
and the same plaintiff law firm, and several witnesses, including the damages expert,
were the same); J.D. Edwards World Solutions Co. v. Estes, Inc.. 91 S.W.3d 836 (Tex.
App. 2002) (award vacated where neutral party-appointed arbitrator failed to disclose
his and his law firm’s relationship with the appointing party; Amoco C.T. Co. v. Occi-
dental Petroleum Corp., 343 S.W.3d 837 (Tex. App. 2011) (award vacated
where arbi-
trator failed to disclose that the firm in which he became “of counsel” during the pre-
hearing stage of arbitration represented a corporate affiliate of the prevailing party and
where that affiliate and its CEO were involved in the transaction underlying the arbitra-
tion); Benjamin, Weill & Mazer v. Cors, 189 Cal. App. 4th 126 (2010) (award in favor of
plaintiff law firm for unpaid legal bills vacated because arbitrator failed to reveal that
his practice focused on representing lawyers in litigation with former clients).
A particu-
larly scathing opinion is Karlseng v. Cooke, 2011 WL 2536504 (Tex. App. June 2011) in
which arbitrator failed to disclose a substantial personal, social and professional rela-
tionship with lead counsel for the prevailing party and arbitrator and lead counsel pre-
sented themselves at commencement of the arbitration as complete strangers.
Aux États-Unis, l’arbitrage commercial est marqué par des périodes
passionnantes et d’autres qui sont plus préoccupantes. Pour comprendre
pourquoi il en est ainsi, nous devons retourner en arrière. Pour des ques-
tions de temps, je vais résumer les faits.

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